[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49367-49368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24058]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37678; File No. SR-GSCC-96-9]
Self-Regulatory Organizations; Government Securities Clearing
Corporation; Notice of Filing of a Proposal Rule Change Relating to the
Establishment of a Mechanism for Returning Certain Excess Clearing Fund
Collateral to Members on a Daily Basis
September 13, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ notice is hereby given that on August 11, 1996, the
Government Securities Clearing Corporation (``GSCC'') filed with the
Securities Exchange Commission (``Commission'') the proposed rule
change (File No. SR-GSCC-96-9) as described in Items I, II, and III
below, which items have been prepared primarily by GSCC. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
GSCC is filing a proposed rule change that establishes a mechanism
for returning certain excess clearing fund collateral to members on a
daily basis rather than on the current monthly basis.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In filing with the Commission, GSCC included statements concerning
the purpose of and basis for the proposed rule change and discussed any
comments that it received on the proposed rule change. The text of
these statements may be examined at the places specified in Item IV
below. GSCC has prepared summaries, set forth in sections (A), (B), and
(C) below, of the most significant aspects of such statements.\2\
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\2\ The Commission has modified the text of the statements GSCC
submitted.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
GSCC proposes to amend its rules to establish a mechanism for
returning certain excess clearing fund collateral to members on a daily
basis rather than on the current monthly basis. GSCC's clearing fund is
designed to protect GSCC from the exposure presented by fluctuations in
the value of a defaulting member's net settlement position from the
most recent marking-to-market until liquidation of that position. The
daily mark-to-market mechanism, which is applicable to forward net
settlement positions, is designed to bring net settlement positions
from contract value to current market value.
The clearing fund collateral pool in fact serves a number of
purposes. It allows GSCC to have on deposit from each netting member
assets sufficient to satisfy any losses that may otherwise be incurred
by GSCC and ultimately its members as the result of the member's
default and the resultant close out of that member's net settlement
position. It permits GSCC to maintain a total asset
[[Page 49368]]
amount sufficient to satisfy potential losses to it and its members
resulting from the default of more than one member or the failure of a
defaulting member's counterparties to pay their pro rata allocation of
loss. It also allows GSCC to ensure that it has sufficient liquidity at
all times to meet its payment and delivery obligations. Thus, the
maintenance of an appropriate overall level of clearing fund collateral
is vital to GSCC's risk-management mechanism.
As GSCC cannot know with any certainty what liquidation exposure it
might incur or what its overall liquidity requirements might be, the
calculation of clearing fund deposit requirements involves an estimate
of such exposure that is based on historical price volatility and on
member's historical activity. In fact, on any particular business day,
a member's trading activity and the general market price volatility
related to the member's activity may be significantly higher than
normal. Given this uncertainty and the importance of the purposes
served by the clearing fund, members are encouraged to maintain excess
clearing fund collateral. GSCC takes significant comfort from the
cushion represented by member's excess clearing fund collateral.
Member's clearing fun deposit requirements are calculated daily
based on the level of members' historical and current day's net
activity. However, the maintenance of an appropriate level of overall
clearing fund collateral is not designed to be a daily collection and
return process. In part, this is due to the administrative burden and
cost that this would entail. The process for collection of clearing
fund deposit involves not just cash but also securities and letters of
credit making it more complex than GSCC's daily morning funds-only
collection process. More significantly, the disfavor of daily
collection and return of clearing fund collateral recognizes the above
stated desirability of maintaining a cushion of excess clearing fund
collateral.
Because of these concerns, GSCC's rules currently provide for the
return of excess clearing fund collateral to members only once a
calendar month on the second business day of each month. This
methodology applies regardless of the level of a member's excess
clearing fund collateral. Upon review of this process, it is GSCC's
view that the importance of maintaining a level of excess collateral
adequate to protect GSCC and its members and of avoiding a cumbersome
clearing fund deposit collection process should be balanced against the
cost and drain on liquidity posed to members that build up an unusually
large amount of excess clearing fund collateral over the course of a
month. GSCC therefore proposes as a means of balancing these interests
that members may request the return of excess collateral on any
business day under the following circumstances: (1) The amount of the
member's excess clearing fund collateral is at least $5 million; (2)
the member is not on class 2 or class 3 surveillance status; and (3)
the collateral will be returned only to the extent that GSCC retains a
cushion of excess collateral of no less than the greater of (a) 110
percent of the member's clearing fund deposit requirement (i.e., GSCC
must retain 110% of the member's clearing fund deposit requirement) or
(b) $1 million more than the amount of collateral needed to cover the
member's current clearing fund deposit requirement.
GSCC believes the proposed rule changes are consistent with the
requirements of Section 17A of the Act and the rules and regulations
thereunder because it promotes efficiencies in the prompt and accurate
clearance and settlement of securities transactions.\3\ Members will
experience less liquidity pressure from not having to maintain large
amounts of excess clearing fund collateral with GSCC and will be better
able to manage their cash management needs. However, at the same time
GSCC will maintain sufficient excess clearing fund collateral to
protect itself and its members in an instance of member default.
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\3\ 15 U.S.C. Sec. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
GSCC perceives no impact on competition by reason of the proposed
rule change.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants or Others
GSCC has not solicited or received comment on the proposed rule
change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which GSCC consents, the Commission will:
(A) By order approve such proposed rule change or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of GSCC. All
submissions should refer to the file number (SR-GSCC-96-9) and should
be submitted by October 10, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12) (1996).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-24058 Filed 9-18-96; 8:45 am]
BILLING CODE 8010-01-M
